The Ted Spread

Ted is the Chief Market Strategist and Vice President in charge of the Zaner Ag Hedge Group and specializes in agricultural hedging employing various strategies using futures, futures spreads, outright options and option combinations. He believes it is paramount to be able to use different strategies to adapt to market conditions. Ted works with large to mid size grain and livestock producers and end users in North, Central and South America.

Grains Gap Higher on Hot Temps

Jul 05, 2012

TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.

I hope everyone have a wonderful, all be it short July 4th holiday! It felt like the good old days with grains opening at 9:30 this morning with no night session trade or electronic market trading into the open. The problem with this is that the very hot temps and dry conditions across the major growing areas during the July 4th holiday break caused a lot of bullish weather enthusiasm. As technical traders know, gaps like to get filled eventually and even though grains have been trading more on weather rather then technicals we now have a big target for a retracement.

I spent my day off dragging my family up to central Wisconsin for a look at the crops and a visit with a few clients. Everybody had a great time despite missing out on fireworks due to hot and dry conditions and fire concerns. The conclusion was - we need rain. I did see some fields that looked ok, but mostly I saw fields that were under some pretty good stress going into pollination, even if those same fields looked pretty good 2-3 days earlier. We also saw a few corn fields that were too far gone for much hope at all. The soybeans seemed to be under stress too but could come back very well with some timely rains and a little cooler temps over the next few weeks.

There is no doubt that the drought or near drought like conditions and scorching hot temps in many areas has caused a decline in yield potential. The question is how much. The USDA will weigh in on the matter on July 11th. I have a feeling that the USDA might hold back on a major (15-20 BPA) reduction in average yield until later reports. From what we have seen from the USDA in the past it seems that they like to stair step into and out of things and we may not get as big of a reduction in yields that the market has currently factored in. So, this report, along with cooler temps next week could trigger a bit of a correction.

Furthermore, I also wonder how low the USDA will actually go when it comes to final yield this year. We have seen them give us some head scratching numbers in the past and I do wonder if this might be a similar situation to some extent. Time will tell. However, I must say that in the long run ultra high grain prices this year is not a good thing for the years to follow. We have to wonder how much demand we will destroy if corn would go to $8.00+ and beans to $17.00+. Ethanol plants would sure struggle with profit margins if crude oil remains at comparatively low prices.

With high volatility in a weather market, option strategies may be a good tool for hedgers and specs alike.

December Corn Daily chart:

November Soybeans Daily chart:

All this means that speculators should be looking for opportunities and producers need to look to lock up some prices while we have new crop corn above $7.00 and new crop soybeans above $15.00. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the strategies that I am currently using.

In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent.

Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs.

Futures, options and forex trading is speculative in nature and involves substantial risk of loss. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.

FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION